Regulations under the Sarbanes-Oxley Act: What Auditors/audit Committees Need to Know and Do to Comply

Article excerpt

The Sarbanes-Oxley Act of 2002 is a major reform package mandating the most far-reaching changes Congress has imposed on the business world since FDR's New Deal. It seeks to thwart future scandals and restore investor confidence by, among other things, creating a public-company-accounting-oversight board, revising auditor independence rules, revising corporate governance standards and significantly increasing the criminal penalties for violations of securities laws. This article highlights the provisions most important to accounting professionals engaged in public company audits.

Determining its full scope and impact remains a work in progress on many levels as the SEC undertakes the task of implementing the act. AICPA President and CEO Barry C. Melancon has affirmed the Institute's commitment to working toward the effective implementation of the act and to rebuilding the faith of investors who depend on accounting professionals for information critical to the capital markets (see "A New Accounting Culture," page 27).

THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD

Sarbanes-Oxley establishes the Public Company Accounting Oversight Board (PCAOB) to regulate accounting professionals who audit the financial statements of public companies. The board's operations are subject to direct and substantial SEC oversight. It, according to the act, is not a government agency and will be made up of five full-time "prominent individuals of integrity and reputation." Two members must be or must have been CPAs. The SEC, in consultation with the chairman of the Board of Governors of the Federal Reserve System and the secretary of the U.S. Department of the Treasury, is responsible for identifying the initial board members. The critical task of finding the right individuals for this job is complicated by the requirement that members of the PCAOB refrain from engaging in any other professional or business activity while serving. The SEC must appoint the chairperson and other initial members by October 28, 2002. The board is responsible for, among other things,

* Registering public accounting firms.

* Establishing or adopting--by rules--auditing, quality control, ethics, independence and other standards relating to the preparation of audit reports.

* Conducting inspections (the successor to peer review for public companies) of registered accounting firms.

* Conducting investigations and disciplinary proceedings.

* Imposing appropriate sanctions to enforce compliance with the rules and laws.

It is important to note the responsibility for establishing auditing, attestation and quality control standards--a function currently performed by the Auditing Standards Board (ASB)--now rests with the Public Company Accounting Oversight Board. While the new board is required to "cooperate on an ongoing basis" with designated professional groups of accountants and advisory groups engaged in standard setting, it w/il have authority to amend, modify, repeal or reject any standards suggested by these groups. Accordingly, the board may, but is not required to, continue to allow the ASB to establish these standards. (The AICPA expects to demonstrate to the PCAOB that the Auditing Standards Board is the appropriate body to continue to set auditing standards.)

REGISTRATION WITH THE BOARD

The Sarbanes-Oxley Act says the Public Company Accounting Oversight Board must take such action necessary to enable the SEC to determine by April 26, 2003 that it is organized and has the capacity to carry out its responsibilities under the legislation. After this determination is made (which could occur prior to April 26), public accounting firms have 180 days to register with the new board or cease all participation in public company audits.

Most of the act's provisions affecting practitioners are effective upon registration with the PCAOB. …